Perks of a government retirement plan

Bringing in representatives can drive up plan fees paid by participants. But there are other factors that influence the cost of 457 plans to workers, such as the size of the plan.

Similar to the corporate world, larger plans are able to negotiate fees more successfully than the smaller ones.

"Smaller plans usually have kind of a product in the box, and providers need to have a little bit more profit margin to service the small plan, so the fees are probably a little bit higher in those plans," says Ness.

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"Some 457s offer more competitive fee structures than 401(k) plans and vice versa. It depends who's at the helm and if their fiduciary responsibilities are taken seriously," Durand says.

Withdrawals and early distributions

When it comes to breaking into the account early, 457(b) plans make it a little bit harder to get money out in an emergency.

"A 457 plan can only make hardship distributions if the participant has no other resources available. They would have to exhaust any monies they had in other places. Then if they took a distribution from the 457, they would have to stop making deferrals for a certain period of time," says Jimmy Williamson, CPA and former member of the American Institute of Certified Public Accountants' National CPA Financial Literacy Commission.

Also, to qualify for a hardship withdrawal, the funds must be not only for an emergency but an unforeseeable one.

"In the 401(k) plan, if you needed money to buy a house or to pay tuition for a dependent, you could do that. But in the 457 plan, those types of foreseeable withdrawals are not allowed. It has to be something catastrophic, like a fire without adequate insurance to replace your house," Pizzano says.

In this case, it's very difficult to get money out. But distributions to workers who retire early are a lot easier. Early distributions, before age 59½, from 457(b) plans are not subject to the 10 percent penalty.

There's a good reason for that, and it's a necessity, says Durand.

"Typically, police and fire departments were the participants in 457 plans for counties or municipalities. And typically, they would retire early on a disability," she says. If the 457 didn't have the exemption for early distribution, they would have been penalized.

That particular provision often comes under fire by those who want to make all defined contribution plans the same, according to Durand. There has been proposed legislation to combine these types of plans, but it is very complicated.

Penalty-free withdrawals before age 59½ could be a double-edged sword. Unless the money is needed, keeping it invested in a tax-sheltered account as long as possible is nearly always the best option for building wealth.

Government employees do get a few bonuses that nongovernment workers might envy, namely the pension. But when it comes to defined contribution plans, 457(b)s have more in common with their corporate counterpart, the 401(k), than differences.

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